so far in this class we have discussed our core principles then we moved on to demand and then Supply what we're going to do today is put demand and Supply together in what we call equilibrium and first thing we're going to do is learn about markets and so here's a question for you let me think about this what's the most recent thing you purchased last time you gave somebody money in exchange for something or a service and maybe that was breakfast this morning maybe if you bought something on Amazon maybe you were at the gas station about gasoline whatever that was what you did was participate in a market because a market is any setting that brings together potential buyers and potential sellers notice that is a very broad definition now we're going to learn some terminology the potential buyers are demanders so the last time you bought something you were a demander who did you buy it from well the potential seller that is a supplier so when you went to the gas station you were a demander and the store that sold the gasoline was the supplier so for example let's think about if you're in the market for a car maybe a used car there are so many options for you so many different markets and a market could be something like a car dealership right that's sort of the traditional market for where you get a used car then there's you can go on eBay maybe you you can buy a Corvette I really like that Corvette oh that's another market so here you've got people from all over the country selling cars uh more locally you can go on Facebook Marketplace plenty of cars for sale there Facebook Marketplace is a market hence the term Marketplace and it could even be something like where you drive by uh a house and you see that there is a car with a for sale sign in the window that also is an example of a market all of these are markets you are active in many markets so when you go shopping you are a demander right you're a potential buyer of goods when you go to work so if you have a job you are actually supplying labor and we'll talk quite a bit more about the labor market uh later on in the semester but when you go to work you're actually a supplier right your boss wants something done they hired you they're paying you money they are demanding labor I mean they're not making you work but you know here we mean demander as hey I will be willing to pay you in exchange for an hour of your labor and you are supplying that labor in class you are demanding an education maybe you're helping your classmates in which case you are supplying an education and notice this is not that I sort of list this idea of helping your classmates as a reminder that it's not always about money right it's not like hopefully you are supplying your your friends with education not because they're paying you but because you know you are friends and you're hoping that they will in one you know potentially Supply you when you need help with another class so that is our brief overview of markets now we are going to move in to equilibrium where we're going to put supply and demand together and first thing we're going to learn is this term called incentives an incentive is an opportunity to make yourself better off and we mean better off we're thinking about the cost benefit principle so you have a chance to do something where potentially the cost of doing that thing is lower than the benefit right so cost is lower the benefit benefits greater than cost that means you should do that thing and if you do you will be made better off so for example if you are walking down the hallway and you see a five dollar bill well five dollar bills laying on the ground you have an incentive to pick that five dollar bill up right the benefit of it is five dollars and the cost is approximately zero right however much of an inconvenience you find having to bend over and pick up a five dollar bill you know that people respond to incentives by acting to make themselves better off so here what we would what you would expect you to do is bend over and pick up the five dollar bill right that's how you acted to make yourself better off you responded to the incentive the incentive was the five dollar bill on the ground you responded the incentive by picking it up and putting it in your pocket and equilibrium is a situation where nobody has an incentive to do something different so this is a common thing you'll see in a upper level economics courses where you learn a term and then immediately after you've learned that term here incentive it goes in the definition of another term so we just learned what an incentive is and we had to learn what an incentive is in order to learn what equilibrium is so equilibrium situation nobody has an incentive to do something different so it's sort of like nobody has a chance to make themselves better off at the grocery store one checkout line has a very long line and the other Shoreline is this an equilibrium you think about that is this an equilibrium well does anybody have an incentive to do something different so this is yes people do have an incentive to do something different so no this is not an equilibrium right no the not equilibrium people in the long line have an incentive to move to the Short Line foreign you're standing at the back of the long line you can make yourself better off by moving to the Short Line so which of the following is true if there is one line and one one long line and one Short Line at the grocery store go ahead and read them think about it all right the answer here is C people in the long line will move to the Short Line eventually an equilibrium is reached and what we would expect the equilibrium to be is both lines are about the same length let's try to figure out how we get there right this is those things that are intuitively you probably understood no if I'm at the grocery store I'm in a really long line I see the Short Line I'm going to move over to the Short Line so and eventually we think that we'll wind up the lines about the same length but let's actually look at how how we can use economics to to arrive at this conclusion well we're going to use a flow chart um remember we had the one flow chart of book where we looked at um marginal benefits and marginal costs that got to the rational rule well this is kind of might look a little bit similar Barbie and equilibrium well we're going to use our definition of an equilibrium would someone be better off if they did something different if the answer is no so if we're at no well we've reached an equilibrium this is our definition of equilibrium it's an equilibrium if nobody has an incentive to do something different so does somebody have an excited something different nope all right we've reached our equilibrium If instead the answer is yes this would be if both lines are the same length right if we see if we sort of started our story with two lines that are the same length we would say all right is anyway having time to do something different no you look at the person in the back of line a they look over at line B they see it's the same length no reason to move person of the end of line B looks over C's line a is the same length no reason to move on the other hand the story we had was there was a short line and a long line would someone be better off if they did something different yes the person at the end of the long line would have an incentive to move to the Short Line they would be better off right instead of having instead of being 10th in line there would be second in line all right so what happens someone has an incentive to change their behavior it will say if the person at the back of the long line person acts on that incentive then we look at our then we go back to the start of the flow charts is this an equilibrium well we have to we do the same thing again would someone be better off if they did something different now now is the answer yes well now we have a new person at the end of the line right person at the back of the line got out went to the other line we have a new person in the back of the long line do they have an incentive now notice the long line has gotten a little bit shorter these Short Line has gotten a little bit longer but if it is still the case that we have a short line and a long line person at the end of the long line has an incentive to change their behavior they act on that incentive by moving to the Short Line and when you get up and we go up repeat the process and eventually what we think will happen is again both lines of the set eventually so many people have moved over from the long line to the Short Line that the two lines are the same length once those two lines are the same length then we go then when we get to that part of the flow chart with someone better off if they did something different we say no nobody will be better off nobody wants to move lines the same length then we've reached equilibrium notice that because the way this flowchart we see the because of the way the flowchart works most situations move toward an equilibrium right so um because people have an incentive to act they act on those incentives and we think eventually people run out of incentives to change their behavior so with the five dollar bill example the five dollar bill laying on the ground is not in equilibrium because whoever sees it has an incentive to pick it up but usually then we will move towards an equilibrium the equilibrium being there's no five dollar bills on the ground you look down around you there are probably no five dollar bills right now all right so we learned about markets then we learned about sort of this definition of incentives which got us to a definition of equilibrium I promised you we were putting supply and demand together today um now we actually are going to start to do that we have a few important assumptions uh before we can go any further one is you're talking about identical products we have lots of buyers and sellers and everyone charges whatever the market price is so think about this as going to be something like milk or corn something or bleach something where there are um the products are identical there are lots of rules governing what you can sell is two percent milk it has to be a you know very standardized product lots of people want to buy milk lots of people sell milk and everyone charges whatever the market price is and what we're just getting at here is there's not a lot of we that you are not a price Center so maybe you don't think about this as of you as someone going to the grocery store right because yeah sometimes you'll go to different grocery stores and the prices might be a little less maybe think of this from the perspective of the person who owns the dairy farm and you own the dairy farm and you are selling your milk on a large market and because the milk is so regulated and you know my two percent milk is the same as your two percent milk you can't really you don't have any ability to set a price you see what the market price is that's what you charge right so something like oil you pull oil out of the ground you can't really say you know my oil is extra special again there's all these rules regarding what counts as a barrel of oil and so how much are you charging for the oil whatever the price of oil is you can look at the newspaper and find out what today's price of oil is so this right here is a demand curve we've seen these before and let's remind ourselves what this means suppose the price is 40. at a price of 40 we will demand 30 units and here's a supply curve and the supply curve tells us that at a price of 40 we will supply 20 units oh sorry we'll Supply 70 units all right so a reminder we will demand 30 units at that price and Supply 70 units so we have a little little uh visualization of that each Mario represents 10 people each Luigi represents 10 people here the Marios are the buyers so we have three Marios so there are 30 people willing to buy for 40 right that's what our demand curve said at a price of 40 we have 30 units demanded here are the Luigi's there are seven Luigi's representing the 70 sellers of the product and they are willing to sell for forty dollars so what happens well the Marios and Luigi's come together imagine this is like maybe there's a you know a big concert and you're trying to go at the last minute and hoping to buy the tickets from someone who's standing outside selling them and there are lots of people wanting to sell them only a few people wanting to buy them buyers and sellers come together and notice we have four sellers left out there were only three buyers we have seven sellers so we got these four sellers representing 40 units you know four Luigi's which represents 40 sellers left out well maybe these sellers will just you know go home and say well couldn't sell my concert tickets um but probably what might happen is one of these sellers sees what's going on and says hey I'll sell for 39 dollars so it's Mario here says wow wow I was gonna have to pay 40. now I can pay only 39. all right let's give it a try and they come together so what does this tell us well and I believe this is the first time we've seen supply and demand on the same graph so what we see then is at a price of 40. we have 70 units supplied 30 units demanded this is what we call a surplus all those extra Luigi's stuck at the bottom corner of the screen they were they represented the Surplus they they wanted to sell the unit but they had no buyer a surplus is a market condition in which the quantity supplied exceeds the quantity demanded when this happens some suppliers will not sell their goods these suppliers have an incentive to cut their price and undercut their other supplies right because my incentive is well I can either sell for 39 or I don't sell at all and my incentive I would be made better off if I charge the price of 39. prices will not be stable if a surplus exists what we mean by that is we do not expect to have this price of 40 last very long right as soon as the price you know the price comes out at 40. the very first thing that happens is someone offers to sell for 39. so 40 is not a price that's going to be stable it's going to be changing so this is not an equilibrium right an equilibrium is nobody has an incentive to do something different what we saw is that this Luigi right here had an incentive to do something different really all of them did right all of them had the Cincinnati to sell for 39 and you can kind of imagine how the story is going to go right once this happens now this will lead you so hey wait and says all right well I'll sell for 38. and and this one comes in and says well I'll sell for 38 too and so on so again we do not have stable prices because we keep finding Luigi's who have an incentive to do something different okay so that doesn't work what yeah the price is 20. well at a price of 20 we have 30 units supplied and 20 units or 70 units demanded so again price of 20 we have 30 supplied 70 demanded so let's go back to our pictures of Mario now the Marios are the sellers the bot the the Luigi's are the buyers so we have these three sellers now so now this is you know a very popular concert where there's only a few people who are willing to sell their tickets and lots of people wanting to buy them at a price of 20. so we're going to sell for twenty dollars buy for 20. so now what happens well now we have these buyers who are left out and you know you want to go to the concert you heard the price is twenty dollars you showed up and it turns out there's nobody who's going to sell it to you what you do if you're this Luigi here you say hey it was really wanting to go to this concert you're gonna you know this my friend here who looks the same as me is going to pay you 20. I'll pay 21. so Mario says all right you know I'd rather get 21.20 so they come together and again this one says well I would pay 21 also so it's a lot of paper money do and so on so this situation here when we have more units demanded than supplied this is a shortage a shortage is the market condition in which quantity demanded exceeds the quantity Supply some buyers will be unable to buy the good right those are the Luigi's who are left over in the corner they will have an incentive to offer more money for the good right I'll pay you 21 I'll pay you 22. so prices will not be stable if a shortage of this right as we talked about the price is 20 and then immediately the price starts changing because some offers a higher price so this is not an equilibrium because the left out Luigi's had an incentive to offer a dollar more okay well that's what's going on here the if those Luigi's offering are offering more and that's going to push the price up 22 23 and so on and let's see what happens well as we get the as we move up as the price moves up we're going to wind up here where they meet and notice the way we can think about what's going on here what is what is called what's this what is causing these lines these points to come together well there are some Luigi's out there so the Luigi's are the uh the sellers let's go back here so these Luigi's are this or the Marios are the sellers so the Marios who are going to sell at 20 there's three of them well then the price goes up to 21 and maybe one of these Mario's calls his Mario friend and says hey it turns out that the uh the tickets are going for more than 20 bucks I know you were thinking about just going to the concert but you know I've heard someone here is willing to pay 23 or 24 and maybe there's a Mario other on the other end of the phone saying oh for 20 bucks I was just gonna go to the concert but if I could sell it for 24 well then maybe I'll sell my ticket so this is when the price goes up we might get more so we'll get more sellers to show up why because Supply slopes up Supply slopes up says as the price goes up you will get more people willing to sell similarly all these Luigi's showed up to buy because they and they heard the price was 20. well then you know this one's sitting there sitting here maybe there's this guy in the back and he says oh well I see what just happened price has gone up to 21. that's not up to 22 and 23 again you know I was willing to pay 20 bucks but I'm just not ready to pay 23 and so this buyer goes home wise go home because demand slows down demand slows down which says that as the price goes up you're going to get fewer buyers so both of those as the so as the price goes up we get more suppliers fewer demanders what's that going to lead to eventually quantity demanded will equal quantity supplied here it happens at a price of 30. we could tell a similar story um of from when the price was at 40. that's what's going on here well the price as the price goes down we're going to see more demanders show up right this is I was at home I heard the price was 40 bucks and my friend is there and says actually at 40 bucks there's nobody willing to buy I think the price is going to go down to 35 and so um the person who wasn't willing to pay 40 but is willing to pay 35 they show up in the market then there's going to be some buyers who said you know what I heard I could sell it for 40. I got here and nobody's paying for it everyone keeps trying to offer 39 and 38 and so on so I'm gonna I'm gonna decide not to settle so that brings us so that was so as this happens we get more buyers fewer sellers with the price going down and eventually we went up here where quantity Supply equals quantity demanded and so that is when quantity is 50. we have 50 sellers 50 buyers who are all those sellers are willing to sell for 30 all the buyers are willing to buy for 30. they come together [Music] and what do we have now we have an equilibrium because notice no Mario is left out no Luigi is left out there's nobody with who wants to offer a dollar more nobody wants to offer a dollar less in the absence of government restrictions we do not expect surpluses or shortages to last very long surpluses will lead sellers to Brit to bid the price down shortages will lead buyers to bid the price up this means that in most markets we observe an equilibrium no buyer willing to pay the market price is left out no seller willing to sell at the market prices left out no one is trying to just undercut or just pay above the market price nobody has an incentive to change their behavior so prices are stable so price they're stable no it hasn't said to change density equilibrium what do we mean by prices are stable well if you think about it this is something we're just sort of used to right when you go to the grocery store to buy a carton of milk there is not a our you know there's not a bartering process that's going on you're not going to be trying to offer more than the person next to you to get more milk no there's milk there if you want it you can buy it at the market price let's think of an example with Uber so this right here is the supply and demand of uber rides so this is if you are a an Uber driver this is what your supply curve might look like where if the price is low I'm not going to supply many hours of uber driving I'd rather hang out with my friends than make just a few dollars price is high now all of a sudden it's worth it to me right I was gonna hang out with my friends this Saturday night then I saw how it spent how you know and then I saw how much I could make so I decided to drive that would be this part right here demand side this is people who are thinking of getting an Uber when the price is high not going to demand many Ubers this is you know I'll call my friend I will decide not even go out that night because I'm concerned it's going to be expensive I'll wait for the fair to die down I'll walk home either way these high prices lead you to not call many Ubers where if the price is allowed they'll say all right yeah for a few dollars I can avoid the hassle of having to wait for a friend get into Uber yeah I'll do it Uber surge pricing is a signal that there are too many riders and not enough drivers who show that here this right here is a scenario where we have lots of demanders right so maybe basketball game or football game just ended lots of people need to get home lots of demanders not many supplies right you know maybe Saturday night people got lots of other stuff they'd rather do than drive maneuver well when this happens Uber is going to kick in Surge pricing that's going to push the price up so this signal that everyone who opens the app whether you're a driver or a writer you see that surge pricing is in there and it's expensive this is a signal to everybody hey we need more people we need more drivers and we need fewer Riders now what happens here is it's not that you know drivers start feeling shareable and say oh well let me try to help them out or writer's like you know what there's lots of people who want an Uber I'm going to be nice and not take one help no this is not like at you know Uber is not asking you to do them a favor no this the high prices create incentives they created sentence for buyers and sellers for the sellers so that a seller then is someone who's selling Uber rides that's going to be a driver the incentive is drivers at home should get on the road and start picking Riders up right they have an incentive to get on the road so they can make more money now increase quantity Supply for the buyers that's get people who are Uber Riders they now have an incentive to consider another form of transportation this will decrease the quantity demanded foreign all these uh drivers who see how it's How much money they can make increases quantity supplied these these sellers who um realize that because who decide that it's too expensive to ride the Uber and they're going to try to get home in another way that's going to decrease quantity demanded so if uh Uber is setting their surge price appropriately these incentives lead to an equilibrium and notice all of this was done not by Uber you know sending emails to drivers and saying hey please please come drive no it was just the price the price was enough to increase quantity supplied and decreased quantity demanded just changing the price gave um opened up those incentives that got us to an equilibrium foreign so this is an article um Taylor Swift announces additional era's tour dates for U.S and Canada Taylor Swift will bring her stadium tour back to the United States in Canada in October and November 2024. so she announced 15 more shows for North American cities those this is from August of 2023 um summer of 23 the the previous months had been spent she had spent touring the country to sold out stadiums and all these news articles about people paying thousands of dollars so she saw how much money there was to be made right that price served as a signal to her when she saw how much Taylor Swift tickets were going for she said oh this is a signal that people want more of my concerts she now has an incentive to have more concerts so she can make even more money so she increased her quantity of concerts supplied next we're going to learn about a market not in equilibrium it's kind of an interesting case study so on New Year's Eve 2015 a computer glitch led to a 26 minute period without surge pricing in New York city so you think about like one of the busiest places to be on one of the busiest days of the year when people are most launching Ubers and the the outage happened at a little after 1am and you see it lasted 26 minutes and what was going on well before the outage the sir The Surge was at looks about triple after the outage The Surge went to 6X the normal rate I've never heard about surgery at that high during the adage however there was no surge pricing it went down to base and there was an economics paper written about it and here's what happened big increase in requests right no surprise there imagine you're getting ready you're you know you're on in Times Square you've been having problem with your friends they're like all right after 1am we've been here all day let's get going we're going to try to call an Uber there's no way it's going to be so expensive and everybody will get one I remember we don't want to pay that much money for it well you open up the app and you see there's no search price so of course you're going to hit request hence the huge increase in the number of requests right not only and you know maybe you requesting you call your friend said hey I don't know what's going on but there's no surge on Uber right now you should request one lots of requests well with lots of people requesting them the ETA got very high right we have lots and lots of people wanting to request Ubers not that many drivers so you're gonna be waiting a long time the completion rate fell sharply so the completion as I understand is basically Uber tracks of the people who request an Uber how many of them actually get on the Uber and get home and that went way down usually they have it it's close to up at or close to 100 percent went down to below 25 so three quarters of the people who requested Uber just couldn't get one right there were so many people requesting an Uber not that many drivers you can imagine if you're a driver um you know you gave up your New Year's Eve with your friends and you said no I'm gonna drive for Uber because I'm going to make so much money during these four hours and then you pull up the app which is not even a surge price what's going on here forget this I'm going back home and so we had a bunch of drivers who weren't driving a bunch of writers more writers than usual and so we have a huge um shortage of uber ride right Lots demanded not many supplied the rate at which ride requests were fulfilled fell steeply a small number of riders got a good deal but most were left without a ride at all so I thought this was a good summary right that if you were one of these people if you were one of the 25 who got your ride completed you did great you paid base fare and you got home but most people over 75 percent of potential Uber Riders then just didn't get home next we're going to talk about what are the most important Concepts which is changes in Supply or demand and how that affects equilibrium we saw how supply and demand can shift now we'll consider the effect of those shifts on prices and quantity so for example let's think about the supply and demand of bang energy drink an advertising campaign successfully convinces soon consumers that bang energy drink is healthy and delicious this flavor is froze Rose sure what that's going to taste like but they've convinced people via commercial that froze Rose is going to be delicious how does this affect the price and quantity of them so this is a very common question you'll see on homework you'll see it on practice problems you will definitely see it on exams how do we solve them our first two steps are what does this change Supply or demand and what is the direction of the shift are we increasing or decreasing shifting to the right shifting to the left so first question an advertising campaign successfully convinces consumers they're being interferent is healthy and delicious like we said how does this affect Supply or demand do we get an increase in Supply and increase in demand increase in quantity demanded or a decrease in demand so this is going to be an increase in demand so this is when we talk about changes in case or references that's what's going on here the advertising campaign convinced people to change their preferences towards energy drink and say hey this one called bang sounds really great that increases demand foreign draw the supply and demand graph include both the pre-change and post change curves so here's what I D1 is the demand curve before the ad campus still working on how everything's flooded what is the demand curve after the ad campaign so D1 here is where we started off demand wise before the ads S1 is the supply curve nothing's changing there so we just have to deal with one supply curve so which of these arbs is the demand curve after the ad campaign the answer here is B we had an increase in demand demand shifted to the right to B Right Next Step find the pre-change and post change equilibrium points thank you so here I I've erased I I got rid of that other line the one that was B though the one that was the wrong answer I've labeled these now D1 and D2 so we'd move from D1 to D2 our supply curve stayed the same so initially we were at S1 and D1 right this is before the ad supply and demand intersected right here that was our initial equilibrium then we had an increase in demand our new equilibrium where Supply equals demand is here because remember equilibrium is where Supply gets demand our price is stable nobody's trying to undercut or offer less so again our equilibrium was here move to here all right last step how did price and quantity change so what you're going to do there is use what you've uh those two equilibrium points the before and after and look how do price and quantity change so what are the effects on price and quantity when we move from D1 to D2 the answer here is a price and quantity both increase this is where we started this is where we were after the advertising so we moved up into the right price went up and quantity went up and this is why bang ran the commercial right they would love to be able to sell more units and be able to charge more for them so that's what they're hoping for from a successful ad campaign all right next thing we will discuss are when we have multiple changes sometimes both supply and demand can change and we want to consider each change individually and then add up the effects the net effects can be indeterminate or ambiguous or unclear unknown if one changes moves price up one moves price down if you have one chain moves Q up and one moves Q down in this class we're not going to learn we're not going to vote we're not going to do anything about magnitudes of these different changes right we're not going to say this moved up price up 10 and this moved it down nine so the net was one no and in fact if we have 10 changes moving price up and one moving price down we still say that's ambiguous because we don't know if that one that's moving it down is bigger than all the other 10 than the 10 moving it up combined okay so again if we have so if it moved in One Direction by one chain moved it another Direction by another change we just say it's ambiguous so here let's continue this example at the same time as the advertising campaign bang opens a new Factory that reduces the cost of making the drink so what I like to do is make this table and we've already done this part of the table with the ad demand increase price and quantity were pushed up now what we'll do is we'll go through the same steps for the new Factory and one thing I want to emphasize here is that notice what we're starting with it's a clean empty graph do not try to do both of these on the same on the same graph and you're going to have all these lines it's confusing I've done a lot of these in you know when I took this course and then I've been teaching this course for several years I do this sort of thing all the time when I'm writing practice rounds writing exams teaching and anyway whenever I do that I know how to do these pretty well I still will draw two separate graphs every time I want you to please do that please don't try to squeeze them both on this on the you know one corner of the paper on the same graph so this is a supply increase remember that was our first step of what changes supplier demand this is an increase in Supply and weight caused by a reduction in um input costs Improvement in technology um marginal costs went down right we know the supply curve is the marginal cost curve so in a um given quantity the cost of production went down so Supply shifts to the right so now we look at our before equilibrium and are after equilibrium so equilibrium move from here to here what does that do it pushes price down and quantity up so again the whole point of that factor is you know what I'd like to be able to make more of our energy drink and I'd like to be able to make it at a lower cost so we'll put this information in our table price goes down quantity goes up and then we just add up the effects so what's the net effect on price well that is on that's an example of where it's ambiguous uncertain indeterminate one move price up one move price down so our net is ambiguous for quantity both of these are going to push quantity up so that net effect will be positive right a positive change plus a positive change gives us a positive change all right that's all we have for today thank you for listening